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Volume Pricing

There are few greater challenges in successfully delivering a building than accurately predicting the financial impacts of design changes


In designing a new sports or recreation facility, the impact of cost on the owner's design wishes is felt early in the project - often, long before design solutions have been generated and estimates of cost, based on these solutions, have been prepared.

In managing the balance between cost and design, it is not unusual or unreasonable for owners to ask questions such as:

• "What is the cost for a three-court gymnasium compared to a two-court gymnasium?" • "What is the cost of an additional 1,000 seats in the arena?" • "What is the cost of doubling the height of the entry foyer?"

Based on the answers received to these and other similar questions, owners will make significant, project-defining decisions. The challenge is to answer these difficult questions early and accurately.

The Design Process

The design process is one that typically proceeds from general to specific and from conceptual to detailed. As a result, there is only a limited ability to accurately predict construction and project costs at the earliest phase of a project. This inability presents a dilemma to both the design team and the facility owner or operator. The early questions, such as those above - which link the facility design to the construction cost - are often the most difficult to answer precisely. This is unfortunate, as the need for accurate information is most important at the outset of the project, to ensure that all future steps taken are affordable and achievable.

In the earliest phase of the design process, known as schematic design, the owner's functional requirements and desires are translated into architectural forms. This phase is also the one in which the architect, by applying creative skill and experience, can deal with often competing and/or conflicting program requirements. During this phase, the technical system requirements (structural, mechanical and electrical) are also investigated and evaluated, and the construction assemblies, types and materials are researched.

The schematic-design phase is normally based on an owner-prepared and supplied design brief - what is known as the functional program. The preparation of a functional program requires experience with the particular building type, something that often only the most sophisticated and knowledgeable owners have. As a result - and because preparing a functional program is not typically provided as part of the architect's "basic services" - specialist consultants are often retained to prepare the functional-program document.

The value of preparing an accurate and thorough functional program cannot be overstated, as this is the phase in which the owner's intended use for and operation of the building is linked to the provision of space and volume. Nowhere else during the design process are the owner's functional needs tied so closely to the building design. Any inaccurate assumptions or erroneous decisions made during this phase will negatively impact all future phases of work.

The actual document contains a verbal description of all spaces required in the building and all calculated areas of these spaces. These discrete, separate spaces are referred to as assignable or net areas. The sum of all net areas, however, does not equal the area of the building. In addition to a building's net areas are the spaces that are not assigned to specific programmatic functions, such as public corridors, mechanical rooms, structural system dimensions, public rest rooms and even wall thicknesses. The total or gross area of a building is comprised of the sum of all assignable and non-assignable spaces. During the programming phase, the exact dimensions of net areas can be accurately analyzed and calculated. Conversely, the amount of area dedicated to non-assignable functions is estimated by the application of a "net to gross" ratio multiplier that will vary from building type to building type. The net-to-gross ratio for a recreation building will normally be a minimum of 1.4 and, depending upon spectator requirements, up to 1.6 (or occasionally higher). As an example, if the net-to-gross ratio for a recreation building is calculated as 1.4 and the total assignable area is 100,000 square feet, then the total building area is 140,000 square feet.

If an incorrect net-to-gross ratio is used - a common "rookie mistake" is assuming a ratio, based on other building types, that is too low - the total area of the building will be underestimated or under-programmed. This error will leave the design team with an unsolvable problem, providing all of the desired assignable areas in too small an overall building area. In effect, the design team is challenged with putting 10 pounds of mud in a five-pound bag. In this circumstance, design and budget success is impossible.

Following completion of the schematic design, the design-development phase commences. During this phase, the schematic design is refined and all architectural, structural, mechanical and electrical system designs are prepared and finalized. By the time design development is completed and approved by the owner, the design is then "frozen" - although reality usually demands that design activities continue past the completion of design development.

Once design development is finished, the construction-documents phase, where working drawings and specifications are prepared, begins. Rather than primarily communicating design ideas and concepts, the main objective of construction documents is to communicate construction detail and assembly - or, the scope of work required of the contractor. For complicated projects, this can consist of hundreds of drawings. Specification documents will normally consist of 16 sections, which contain written documentation that describes the work to be undertaken and provide information to be read and interpreted with the working drawings.

Building a Budget

When preparing budgets for facilities, it is important to understand the differences between construction costs and project costs. Failure to understand and acknowledge these differences can result in serious project difficulties. As the names imply, construction cost only applies to the actual cost of building, while the project cost includes all costs incurred in undertaking and executing a building project. In addition to the building capital costs, project costs will include (but are not necessarily limited to) the following costs:

• Land purchase • Permits and jurisdictional costs • Professional fees and expenses • Owner's management costs • Legal costs • Marketing/sales costs • Financial costs and fees • Furniture, fixtures and equipment • Construction testing services • Insurance • Contingencies • Federal and state taxes

The building capital costs will typically be between 75 and 80 percent of the total project cost. Costs that make up the difference between the construction and project costs are normally referred to as "soft costs." It is important when quoting or discussing the cost of a building that the total project cost is referenced and not solely the building capital or construction costs.

The Cost Estimating Process

Consistent with the design process, the cost estimating process also moves from general to specific, as each successive level of design detail is added. In general, cost estimating can be conducted in three ways - order-of-magnitude estimating, unit-rate estimating, and elemental estimating. All three approaches can be, and often are, applied during a project.

In applying any of the cost-estimating tools, it is important to recognize regional differences and cost variations. The cost of construction in the Midwest will be lower than that in New England, for example. Failure to account for these variations will render a project either under- or overcapitalized - an undesirable situation in either case.

Order-of-magnitude estimating is based entirely on the application of historical data or experience, and is used only in the very early phases of a project. It is used simply to give a general indication of construction or project cost or, conversely, a general indication of the building size that a predetermined budget would support. As a result, it is the most inherently inaccurate method of estimating.

There are two distinct approaches to order-of-magnitude estimating:

Unit-cost approach. In this approach, a very general cost per unit area is applied to provide a general idea of the project scope or budget. For example, if an owner has access to $20 million for a recreation building and the order-of-magnitude project cost is determined to be $200 per square foot (the construction cost would therefore be about $180 per square foot), then the gross building area possible would be 100,000 square feet (the net area would be a maximum of 71,500 square feet). Conversely, if a building of 71,500 net square feet is desired or programmed, the resulting project cost would be $20 million (if the $200-persquare-foot project cost multiplier were applied).

Unit-use approach. In this order-of-magnitude scenario, a cost per unit, such as the cost per seat of a stadium or arena project, is applied. The total cost is determined by multiplying the unit-use cost by the number of units. In applying this approach, it is essential that the scope and quality of the project (or projects) used to create the unit-use multiplier is similar to that of the proposed project. For an arena or stadium project, variations in the following must be accounted for:

• Structural system • Roof covering system • Number and size of concourses • Number, size and scope of private boxes • Seating system size and type • Retail-outlet and food-services provisions • Sound, scoreboard and video system requirements

Variations in any or all of these elements could render the unit-use estimate inaccurate or, more seriously, meaningless.

During the functional-programming and early schematic-design phases, unit-rate estimating processes are normally applied. In this case, unit-rate estimates (cost per square feet) for each building area or space are applied. The unit rates are assumed to include costs for all building systems and components (architectural, structural, mechanical and electrical).

The unit rates vary based on the understood or assumed variations in construction costs between building components. The unit rate, for instance, for an aquatic component will typically be the highest encountered in a sports or recreation center. This is because of the necessity for an internal environment that features high-quality building finishes and specialized HVAC (heating, ventilation and air conditioning), filtration, mechanical, structural and electrical systems. The lowest unit rate areas normally relate to building-services areas (such as storage) and low-demand occupancies.

Total capital construction cost is calculated as the sum of all unit-rate estimates for all building components.

Finally, elemental estimating, which usually begins in the schematic-design phase and continues throughout the balance of the project, is an estimate of all building materials and construction systems. (It should be noted that during the schematic-design phase, detail regarding many building components, such as mechanical and electrical systems, may be lacking, which will necessitate using order-of-magnitude estimates for those disciplines.) The cost estimate would be prepared based on the following categories:

• Substructure, including foundations and slab on grade • Superstructure, including columns and roof structure • Exterior cladding, including walls, windows, entrances and projections • Weatherproofing, including roofing and skylights • Vertical movement, including stairs and elevators • Interior division, including partitions and doors • Interior finishes, including floors, ceilings and walls • Mechanical systems, including HVAC and plumbing • Electrical systems, including lighting and power

The level of accuracy expected with elemental estimating far exceeds that achieved with either the order-of-magnitude or unit-rate processes. As elemental estimating can only be conducted after many design decisions regarding size, scope and quality have been made, it is not a tool that should be used to compare general design options or solutions. All such comparisons should have been done far earlier, using appropriate (general) estimating procedures.

Unfortunately, situations arise in which budget allocations and the design solution are not aligned, and the owner cannot afford to build what has been designed. If this problem is discovered during the design-development phase of a project, a value analysis (or "value engineering") process will need to be implemented. In this process, cost reductions based on reducing quality or building area are identified and estimated (using elemental-estimating procedures). Hopefully, savings can be made without significantly affecting the building design or area (and as a result, the program).

Cost Comparisons and Evaluations

During the early phases of a project, substantial variations in building volume and footprint may be considered. A challenge for the owner and the designer is to understand and quantify the cost impacts of these changes.

If the area of a space is adjusted but the quality of the space remains unchanged (for example, if interior finishes are not adjusted), then the calculated unit rate will remain unchanged. The financial impact is determined by simply multiplying the unit rate by the area increase (or decrease, as is often the case).

Returning to the questions that began this article, if an owner wants to know the financial impact of constructing a three-court gymnasium instead of a two-court gymnasium, the exercise begins with identification of the area difference between the two models. This area difference would be about 7,000 square feet.

To determine the capital construction cost premium, the unit rate is multiplied by the assignable area. To determine the total project cost impact, the capital construction cost is multiplied by 1.2 to 1.25. In this example, assuming a unit rate of $150 per square foot, the capital construction premium would be $1.05 million, and the total project cost addition would be about $1.3 million.

The second question (regarding the cost of an additional 1,000 seats in an arena) is more difficult to address, as the impact of adding seats involves more than simply adding area to the seating bowl. The analysis must also account for the seats themselves, concourses and foyers, and rest rooms and concessions stands to serve the additional patrons. The additional areas would be calculated as:

• Seating Bowl: 1,000 seats @ 6 square feet per seat (6,000 square feet) • Concourse/Foyer: 1,000 spectators @ 3 square feet per spectator (3,000 square feet) • Rest rooms/Concessions: 1,000 spectators @ 1.3 square feet per spectator (1,300 square feet)

This adds up to a total assignable area increase of 10,300 square feet. Using a 1.4 net-to-gross ratio multiplier, the total gross building area would increase by 14,500 square feet. The capital construction cost impact, using an assumed unit rate of $150 per square foot, would be $2.2 million. The additional total project cost would be in the order of $2.75 million.

While the above analysis is intended only for demonstration purposes, it is important to understand that the areas could vary depending on the total size of the arena and seating bowl. Obviously, the impact of a 1,000-seat addition will be far greater if it is being made to a 2,000-seat facility than it would for a 20,000-seat facility.

In cases in which the footprint remains unchanged but internal volume is increased, the unit-rate calculation must be adjusted accordingly. The challenge is to determine the appropriate amount of change to apply.

The third question asked what the financial impact would be if the internal volume of an entry foyer were doubled. As noted, the unit rate contains estimates for all building components: architectural, mechanical, structural and electrical. Typically, the percentage amounts for each component is:

• Architectural: 40 percent of construction cost • Mechanical: 30 percent of construction cost • Structural: 20 percent of construction cost • Electrical: 10 percent of construction cost

For demonstration purposes, the unit-rate cost for a facility component is estimated to be $200 per square foot. In the early stages of design, an approach to estimating the unit-rate cost impacts of increasing internal volume could be as follows:

• The architectural budget would be impacted by the increase in wall height (interior and, potentially, exterior). The balance of the interior finishes would be expected to remain unchanged. If the increased volume does include the exterior wall system, the increase in the architectural budget could be in the order of 20 percent. The revised unit-rate architectural cost would be $96 per square foot.

• The unit rate for the HVAC portion of the mechanical system (75 percent of the total mechanical budget) will increase because of the increased internal volume. The increased volume could result in the HVAC costs being increased by as much as one-third. The revised unit-rate mechanical cost would be $75 per square foot.

• The unit-rate cost of the structural system will increase because of increased column and foundation sizes necessary to bear the load of the higher structure. The increase would be estimated to be in the order of 15 percent of the structural cost. The revised unit-rate structural cost would be $46 per square foot.

• Increased lighting requirements resulting from the increased volume could increase the electrical budget by approximately 10 percent. The revised unit-rate electrical cost would be $22 per square foot.

Based on this analysis, the unit rate for the high-volume space could be expected to be on the order of $240 per square foot, which represents a 20 percent increase from the low-volume option. To further advance the example, if the area of high volume were 1,000 assignable square feet, then the capital construction budget would be $240,000 and the project budget would be around $290,000. By comparison, the budget cost for the low-volume equivalent space would be $200,000 in capital construction cost and $240,000 in total project cost.


In order to successfully deliver a project, it is important to understand the need for establishing project contingencies early in a project and maintaining contingencies throughout the project. Contingency allowances should be appropriate for the stage of the project; they should be relatively high early in the project and decrease as the project moves through the design and construction phases. While it is common to only identify a single contingency, it is prudent to establish contingencies for both design and construction activities. Because of the increased uncertainties involved, it is also suggested that contingency allowances be higher for renovation projects than with new construction.

The provision of adequate contingencies can save projects that would otherwise experience financial distress. While it is not always easy to establish or maintain adequate contingencies, doing so will help overcome a multitude of cost-estimating sins.

The Price Is Right

There are few greater challenges in successfully delivering a building than accurately predicting the financial impacts of design changes. The architect's ability to provide guidance to the owner in evaluating the tough questions early in a project can conceivably make the difference between a successful project - and client relationship - and a project failure.

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